U.S. Economic Strength: What Is The ‘Smart Money’ Telling Us?

(Note: This article has been featured in the LinkedIn Channels Banking & Finance, Economy and Editor’s Picks)

Smart Money – If you’ve ever bet on the ponies the ‘smart money’ will typically be the money wagered right before the betting windows closed. Theoretically these are the people who may have an inside track about the horses involved. In the financial world, the ‘smart money’ is the ‘cash invested or wagered by those considered to be experienced, well-informed, “in-the-know” or all three’ (Investopedia).

So What Economic Indicators Should Investors Be Watching As A Gauge Of Future Economic Strength?

This morning the release of the July Employment Report showed a greater than expected increase in non-farm payroll jobs (+209,000) and a tick-down in the unemployment rate to 4.3%, although hourly wage growth at 2.5% was nothing to write home about. Is the economy strong and still growing? Are stocks poised for another leg-up? Is it time to wave the yellow caution flag?

If only the answer could be right there in front of us. Of course it’s not that simple, but how does the individual investor try and become the financial markets ‘smart money’? These are just some of the indicators to keep an eye on…

Stock Market: With the stock market at record highs and likely to extend those gains today, is this telling us that all is well on the economic horizon as most stocks not Tesla and Amazon are priced at some multiple of earnings? Or in an interest rate environment that provides limited returns and the potential for pain if rates actually do rise, are stocks the only game in town where high potential returns can hopefully be achieved? In other words are the historically risk averse investors being forced to take outsized risks i.e. pension funds, retirees, etc.?

Federal Reserve: With interest rates still near historically low levels that would normally indicate economic weakness, is the Fed telling us that the U.S. economy is sailing full steam ahead? With a mandate of full employment and low inflation one would have to say that the jury is still out on how the Janet Yellen-led group sees things. At 4.3% unemployment it appears that they have achieved the full employment piece, but inflation does not increase to their target and so the fed funds rate languishes where it is (‘Can US Interest Rates Ever Rise?‘).

Shape Of The U.S. Treasury Yield Curve: While the Federal Reserve can and typically does impact short-term interest rates, any move up or down in the fed funds rate will not have any direct impact on long-term interest rates. Therefore, if the the Fed increases rates and longer-term bond investors keep yields unchanged, the yield curve flattens. This means that the spread between the yield on a 6-month bill and a 30-year bond move closer to each other. Currently the U.S. has a flatter than is historically normal yield curve that can sometimes mean the economy is moving towards a recession.

U.S. Dollar: When the U.S. economy strengthens the assumption by various financial marketplaces will normally be that U.S. interest rates will at some point rise. When U.S. interest rates rise this will typically mean that the U.S. dollar will strengthen against other major foreign currencies such as the Euro. As is obvious from the 1-year chart below, this has not been the case (a weaker dollar does however benefit U.S. corporate earnings derived outside of the country). Is the issue U.S. politics, a stalled Trump economic agenda or a fear that the U.S. economy is in fact weakening?

So where is this all heading? Stay tuned!

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